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Are you considering flipping your first home? Congratulations on taking the first step towards a potentially lucrative investment opportunity! However, before you jump in headfirst, it's important to be aware of all the potential costs and fees involved. One expense that can easily be overlooked is closing costs. In this blog post, we'll explore why you need to watch out for these costs and how to factor them into your budget.

What are Closing Costs?

Closing costs are expenses that are incurred at the end of a real estate transaction when the property changes hands. These costs are usually paid by the buyer, but in some cases, the seller may cover a portion of them. Closing costs can vary depending on the location, price of the property, and the type of transaction. Common costs include:

1. Agent Commission: The commission paid to the real estate agents involved in the transaction, typically around 5-6% of the sale price.

2. Escrow Fees: Fees charged by an independent third party who holds and manages the funds and paperwork during the transaction.

3. Title Fees: Fees for title search, title insurance, and other title-related expenses.

4. Appraisal Fees: Fees for a professional appraiser to determine the value of the property.

5. Inspection Fees: Fees for a professional inspection of the property to uncover any potential issues.

Why You Need to Watch Out for Closing Costs

Closing costs can add up quickly and significantly impact your profit margin. As a first-time home flipper, it's essential to factor these expenses into your budget before purchasing a property. The last thing you want is to think you're making a great return, only to find out that the majority of it is going towards closing costs.

How to Factor in Closing Costs

To accurately factor in closing costs, you'll need to calculate them as a percentage of the After Repair Value (ARV). ARV is the estimated value of the property after all necessary repairs and upgrades have been made. As a general rule of thumb, closing costs typically account for 6-7% of the ARV.

For example, let's say you purchase a fixer-upper property for $150,000, and you estimate that it will cost $50,000 to make the necessary repairs and upgrades. Your ARV would be $250,000 ($150,000 + $50,000 = $200,000, plus $50,000 in estimated repairs). If closing costs are 6%, then you would need to account for $15,000 in closing costs ($250,000 x 0.06 = $15,000).

Flipping a home can be an exciting and lucrative investment opportunity, but it's important to approach it with caution and a clear understanding of all potential costs and expenses. Closing costs can easily be overlooked, but they can significantly impact your profit margin. By factoring them into your budget before purchasing a property, you can ensure that you have an accurate picture of your potential return on investment. So, before you go for a deal, make sure you account for those closing costs!